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Business risks facing mining and metals 2011 - 2012 - 3. Infrastructure access - EY - Global

Business risks facing mining and metals 2011 - 2012

3. Infrastructure access

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“Given that demand for mining and metals is expected to increase in rapidly developing economies, some mining companies are responding to this by investing in infrastructure in an attempt to reduce potential bottlenecks, and meet that demand for supply.”Neal Johnston, Partner, Infrastructure Advisory, EY

Summary: The ability of mining and metals companies to achieve growth in production, or get new product to customers is often limited by the capacity of the available infrastructure, i.e., power, water, shipping, ports and rail. Expansion of infrastructure in many countries has not always kept pace with the sustained growth in demand and has in turn created infrastructure capacity constraints.

Export customers won’t wait, and where infrastructure constraints exist, this creates a significant risk of loss in potential market-share as competitors step in to fill the gap.

Infrastructure access has become more of an issue of risk in the last year, mainly because the lack of available infrastructure means that production cannot get to the markets where the demand is. In fact Sinosteel has terminated its West Australian iron ore project due to delays in infrastructure.

A lack of sufficient rail networks appears to be the largest global bottleneck. Some current and well-known rail bottlenecks include Australia’s Queensland coal rail development, China’s third coal rail development and Russia’s aging rail network.

Recent innovation in financing infrastructure, such as greater use of take-or-pay contracts, has enabled additional investment in critical infrastructure by current infrastructure owners. However, if the sector is to meet the expected supply challenges for the expected growth in demand from the rapidly developing economies, greater innovation is required to bring together producers, customers, infrastructure, operators, financiers and governments.

Steps mining and metals companies can take to respond to this risk:
  • Considering the extent to which infrastructure deficits may impact on enterprise value
  • Understanding the return on all capital expenditure, including infrastructure, and considering appropriate financing
  • Looking for other stakeholders to co-develop a solution with shared benefits

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